Limited Application of Covenant of Good Faith and Fair Dealing in Earn-outs – David M. Czarnecki
In M&A transactions, earn-outs are often used to bridge the gap between buyers and sellers in negotiating the value of the business of the target company, with a portion of the purchase price contingent upon the target’s post-closing financial performance. Negotiating the terms of an earn-out can often prove difficult, as a seller will want protections to ensure a reasonable chance that the earn-out targets will be met, while a buyer will want maximum flexibility in operating the business of target post-closing.
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Taxation of Earn-out Payments in M&A Transactions – Robert M. Finkel
It has become increasingly common in M&A transactions that the consideration paid to the sellers includes amounts that are contingent upon later events, such as the post-transaction performance of the target. For example, the buyer and seller may agree that the sellers will be paid an additional amount if the target hits certain revenue or earnings goals over some agreed period of time after the closing. These “earn-out” payments are often used when the seller and buyer cannot reach an agreement on the value of the target. Earn-outs can be particularly helpful when dealing with early stage companies where value may be better represented by future (rather than historic) performance.
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Delaware Clarifies Limited Liability of Independent Directors – Joseph R. Martinez
The Delaware Supreme Court recently issued an important decision about limitations of the liability of independent directors in an interested transaction. The opinion was a consolidation of two cases that revolved around the same question: where the plaintiff challenges an interested transaction with claims for damages against corporate fiduciaries, must the plaintiff plead a non-exculpated claim against the independent directors? The Delaware Supreme Court stated that the question raised in these appeals presented “a debate between two competing but colorable views of the law”, but ultimately decided that, when a director is protected by an exculpatory charter provision, a plaintiff must plead a non-exculpated claim for breach of a fiduciary duty against an independent director, or that director will be entitled to be dismissed from the suit regardless of the underlying standard of review that applies to the transaction.
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